Everything U.S. companies know about sustainability reporting is about to change. For years, U.S. company sustainability reports have been voluntary disclosures that provided varying details into an organization’s corporate responsibility initiatives and their impact on society. However, under the European Union (EU) Corporate Sustainability Reporting Directive (CSRD), companies doing business in Europe will need to develop robust reporting procedures to ensure they meet the requirements set forth by EU regulators or risk non-compliance penalties and public scrutiny.
At a high-level, the CSRD contains significantly enhanced criteria for monitoring and reporting relevant environmental, social and governance (ESG) information. Companies that are conducting business in Europe will need to assess roughly 1,200 indicators surrounding their sustainability impacts, risks and opportunities. All this information must then be put into a detailed report that presents the company’s qualitative and quantitative disclosures with the same rigor as financial reporting.
While the CSRD is a European regulation, many U.S.-based companies may not be aware that they, too, fall within its scope. Due to the complexity surrounding the directive and its implications, U.S. business leaders may be confused about whether it applies to them and what their next steps should be. To clarify this, it’s important to dispel some of the common myths and misconceptions organizations may have about the directive.
Many U.S. companies are under the impression that the CSRD reporting requirements do not apply to them until 2029.
This assumption stems from the fact that non-EU companies with over €150 million in annual sales in the EU are not required to report until 2029. However, what many U.S. companies may not realize is that EU-based subsidiaries may face reporting obligations as early as 2026. EU subsidiaries that meet specific thresholds – such as exceeding €50 million in annual revenue, €25 million in assets or having more than 250 employees – will need to begin reporting in 2026, based on FY25 data. This leaves only one year to prepare reporting for these entities.
Since this is an EU law, many U.S. business leaders think that the reporting responsibility falls entirely on their European subsidiaries and their financial reporting teams in the EU. But that may not be the case. Sustainability reporting is most commonly done at the parent company level and subsidiaries may lack the full organizational visibility required to prepare sustainability-related disclosures. Furthermore, they typically don’t have dedicated sustainability reporting teams.
Oftentimes, it is the parent company of these “large undertakings” that is responsible for preparing these disclosures, inclusive of all subsidiaries that roll up to the EU parent. This creates a significant challenge for U.S. companies whose sustainability reporting functions are centralized at the U.S. parent level and have not yet been required to perform subsidiary-level reporting.
Ironically, European business leaders may assume that their U.S.-based colleagues possess the necessary oversight, and everything is in hand. This assumption is also costly. The CSRD process requires trans-national collaboration and communication. Leaders in the U.S. and EU must work together to ensure the process moves in the right direction.
Companies will need to engage several parties to support their reporting process. At a minimum, they'll need to identify an independent auditor to review the disclosures as part of a CSRD requirement. Companies will also likely need external support to help conduct their double materiality assessment and stand up their reporting procedures to ensure alignment with constantly evolving standards. Lastly, having a reporting tool that can support the electronic tagging and audit trail will improve efficiency and controls. Many U.S. companies also aren't starting their CSRD reporting from a similar point of maturity as European entities – they need support from a seasoned team that understands the European reporting landscape and has experience across reporting, digital solutions and assurance to meet their needs.
Achieving CSRD compliance will require significant collaboration and investment, which may be challenging for sustainability teams who often have limited budgets and operate within organizational siloes. To achieve compliance, sustainability teams should engage with organizational leadership to secure the necessary budget and cross-functional support.
Companies that have not started on their CSRD compliance steps need to act now. Because of how involved this process is, delaying any further could risk delays in reporting that create material findings during the audit process, regulatory fees for delayed reporting and other challenges.
In addition, the public nature of these reports means there’s a reputational risk involved in delaying their sustainability reporting and efforts. With approximately 50,000 EU companies disclosing key information as part of their CSRD reporting, businesses will inevitably be compared with one another – and the results of that could have impacts on peer perception, competitive advantage and other factors.
Over the next several months and years, U.S. companies must fundamentally rethink how they approach sustainability reporting. Even though the CSRD is EU-focused, EU based companies are not the only organizations that fall under its applicability. U.S. companies have the unique opportunity to learn about sustainability reporting and materiality from European organizations and implement best practices based on their experiences.
What was initially a voluntary exercise for the last few decades has turned into a mandated multiyear change management process, and any company that does business in Europe must carefully assess where they currently stand and what they need to do to comply with the directive’s requirements.
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Benjamin Martin is a manager on the environmental, social and governance (ESG) and sustainability team with Baker Tilly’s risk advisory practice. He has over seven years of experience in corporate sustainability reporting and helping organizations accurately monitor, manage and report climate-related information. Benjamin’s previous experience includes both consulting and in-house sustainability management at public companies.
